What is the effect called when the sum of the elasticity of demand for imports and exports affects the current account?

The correct answer is the Marshall-Lerner Condition. This principle states that a devaluation or depreciation of a country's currency will improve its current account balance if the combined price elasticity of demand for exports and imports is greater than one. In simpler terms, if the demand for exports is sufficiently elastic, a fall in the currency’s value will lead to a proportionally larger increase in the quantity of exports demanded, and a corresponding decrease in the quantity of imports as they become more expensive, thus improving the current account balance.

The importance of the Marshall-Lerner Condition lies in its focus on the responsiveness of demand for both imports and exports to price changes. If consumers respond significantly to price changes (high elasticity), the overall trade balance will improve following currency depreciation. If the sum of these elasticities is less than one, the current account might worsen instead of improve from a depreciation.

This concept is foundational in understanding international trade dynamics and helps economists predict how shifts in exchange rates will impact a nation's economy. It is not related to the other options, which deal with different economic concepts; Absolute Advantage and Comparative Advantage refer to theories about production efficiency and trade benefits, while Elasticity Trap does not exist as a recognized economic concept.